Directive Directive 00-5: Partner's Elective Contribution to an IRC s. 401(k) Plan

Date: 06/27/2000
Organization: Massachusetts Department of Revenue
Referenced Sources: Massachusetts General Laws

Personal Income Tax

ISSUE: What is the Massachusetts tax treatment of a partner's elective contribution to an IRC § 401(k) plan?

DIRECTIVE: The partner's elective contributions, including any partnership matching contributions that are treated as elective contributions, are excluded from Massachusetts gross income, provided they are excluded from federal gross income.


A. 401(k) Plan - Qualified Cash or Deferred Arrangement (CODA)

A cash or deferred arrangement (CODA) is a popular plan feature of IRC § 401(a) qualified profit-sharing, stock bonus or money purchase plans. A CODA allows an employee to choose between receiving cash or electing to have the cash placed in a qualified pension plan, which in this instance is a profit-sharing plan. Treas. Reg. §§ 1.401(k) - 1(a)(2)(i). A CODA can be either qualified or nonqualified. A qualified CODA is commonly referred to as a "401(k)" plan, a reference to the Code provision that describes and controls its federal tax treatment. In general, to be qualified, a CODA must satisfy the standard discrimination requirements, distribution limitation rules (such as the prohibition of distributions before age 59 ½) and the nonforfeitability requirements. Treas. Reg. § 1.401(k)-1(b),(c),(d).

B. 401(k) Contributions - Exclusion from Gross Income

Massachusetts gross income equals federal gross income with certain modifications not relevant to this inquiry. G.L. c. 62, § 2. Employer contributions to a qualified plan are excluded from an employee's federal gross income. Treas. Reg. § 1.402(a)-1(a). Employee contributions, however, are included in the employee's federal gross income. Treas. Reg. § 1.402(a)-1(d)(1). But when an employee makes an elective contribution to a 401(k) plan, such contributions are considered, by regulation, to be made on behalf of the employee by the employer and are not treated as employee contributions. Treas. Reg. § 1.402(a)-1(d)(2)(i). Instead, such elective contributions are given, by regulation, the same pre-tax benefit as employers' contributions to a qualified plan. Treas. Reg. § 1.402(a)-1(a). Therefore, elective contributions to a 401(k) plan are excluded from federal and Massachusetts gross income. IRC § 402(e)(3); Treas. Reg. § 1.401(k)-1(a)(4)(iii).

C. Partnership 401(k)s

A partnership is allowed to have a 401(k) plan, which includes any arrangement that directly or indirectly allows partners to vary the contributions made on their behalf to the plan. Treas. Reg. § 1.401(k)-1(a)(6)(i), (ii)(A). The partnership is treated as the employer of each partner who is an employee. IRC § 401(c)(4). For tax years beginning before January 1, 1998, if the partnership made matching contributions to a partner's elective contributions, the matching contributions were also treated as elective contributions, and therefore excluded from gross income. Treas. Reg. § 1.401(k)-1(a)(6)(iii). For tax years on or after January 1, 1998, partnership matching contributions are treated as elective contributions only if the partnership elected to have them so treated for purposes of the nondiscrimination test for 401(k) plans. IRC § 402(g)(9). [1] Though the federal rule for what constitutes a partnership's elective contribution changed in 1998, the result for Massachusetts tax purposes remains the same: if the partnership's contribution is excluded from federal gross income, it will be excluded from Massachusetts gross income.

/s/Frederick A. Laskey
Frederick A. Laskey
Commissioner of Revenue


June 27, 2000

DD 00-5

Table of Contents

[1] If the partnership does not elect to have the matching contributions treated as elective contributions, the matching contributions are included in the partner's federal and Massachusetts gross income. For federal tax purposes, the partner's distributive share of contributions made by the partnership on his behalf are deductible. IRC §§ 404(a),(a)(3),(a)(8); 702(a)(8); Treas. Reg. § 1.404(e)-1A(f)(1). However, for Massachusetts tax purposes, the deduction is statutorily disallowed. G.L. c. 62, § 2(d)(1)(D).

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